United States: Tax Policy Update - February 24, 2015

NUMBER OF THE WEEK: $160,000. The value of one gift bag at the Oscars on Sunday night. According to the Internal Revenue Service, contents of the gift bags cannot be treated as gifts for federal income tax purposes because the merchandise is not given "solely out of affection, respect, or similar impulses for the recipients of the gift bags." Celebs are thus expected to report the $160,000 amount on their federal returns as taxable income. Check out the list of goodies here.


Hatch's Working Groups Humming Along. The Senate Finance Committee's five working groups tasked with drafting bipartisan recommendations for tax reform are expected to turn in their reports at the end of May. A tentative schedule with three distinct phases of work is guiding the working groups towards the May deadline, although we understand that interpretations of what each phase entails vary among the groups.

Almost all of February and March are slated for "education," which means members and staff are meeting with experts from the Joint Committee on Taxation, academia, and think tanks to ask questions and gather information. Some groups are also looking to outside stakeholders for input during this phase, while others don't expect to engage with stakeholders until late March when the groups enter the "roundtable" phase of the process. The exact format of these roundtables remains uncertain. What we do know is that each working group (business, individual, savings and investment, international, and community development and infrastructure) is approaching the process differently and progressing at varying rates. We hear the international group, for example, is moving quite rapidly.

What can we expect out of the final recommendations at the end of May? We understand that the groups are each largely driven by the respective co-chairs overseeing them, but they all have one very clear directive from committee leadership: keep it bipartisan. If the groups stay true to this principle, we can expect a very narrow set of recommendations, rather than sweeping reforms.

JCT Releases Report on Tax Policy and Economic Growth. In preparation for the Senate Finance Committee's hearing on "Tax Reform, Growth, and Efficiency" on Tuesday, the Joint Committee on Taxation has prepared a report detailing how tax policy can influence the four key drivers of economic growth: labor supply, capital investment, technological progress, and human capital. According to the report, lowering taxes on wages and business income as well as reducing education costs can help boost labor supply, physical and human capital investment and productivity, which altogether would help increase economic output. The report also includes a set of historical data on productivity, labor and GDP growth.

White House Makes Case for Tax Reform, Examines Alternatives. In its 2015 Annual Economic Report of the President, the White House Council of Economic Advisers devotes a chapter on the necessity of and approaches to business tax reform, presenting four alternatives to consider: (1) elimination of the corporate income tax; (2) cutting the top individual rate, parallel with the corporate rate; (3) adoption of a territorial tax system; and (4) allowing expensing for new investment. The report notes that business tax reform, if done properly, can increase productivity and boost investment in the United States without exacerbating "other challenges" (i.e. adding to the deficit in the medium- and long-term). "Business tax reform...should complement the rest of the growth agenda – including by funding investments in infrastructure – as well as a broader agenda involving individual tax reform," the report said. Read the full report here.


IRS Releases First Round of Guidance on "Cadillac Tax." The Internal Revenue Service on Feb. 23 formally initiated its rulemaking process for the Affordable Care Act's 40 percent excise tax on high-cost health plans, set to take effect in 2018. Notice 2015-16 addresses issues surrounding the definition of "applicable coverage" and how its cost should be calculated for purposes of determining whether the so-called "Cadillac tax" is triggered.

The notice clarifies that "applicable coverage" under Section 4980I includes flexible health spending accounts, Archer medical savings accounts, health savings accounts, governmental plans, coverage for on-site medical clinics, retiree coverage and multiemployer plans. But the notice also states that the agencies expect to exclude employer contributions to HSAs and Archer MSAs from applicable coverage, as well as employee after-tax contributions to HSAs and Archer MSAs.

The IRS and the Treasury Department plan to put out another notice before issuing proposed rules under Section 4980I. That notice will address additional issues, including procedures for calculating and assessing the tax.

Anti-Inversion Regulations Expected in 2015. A Treasury official said anti-inversions regulations based on Notice 2014-52 could possibly be released before the end of the year. Brenda Zent, a taxation specialist in Treasury's Office of International Tax Counsel, stated that they "will definitely be issuing regulations" although there is no specific deadline for its release. Although Notice 2014-52 didn't consider any earnings stripping rules, Treasury is still looking at ways of addressing the issue. Of note, the insurance industry is seeking changes to the anti-inversion rules. In particular, four insurance industry groups have asked the exception for passive assets of insurance companies be expanded to be in line with banks. The groups say the current rule is too restrictive and that the Notice has already reduced the number of non-abusive transactions.

Dividend Equivalent Regulations May Hinder Foreign Investment. As the dividend-equivalent regulations under section 871(m) are expected by mid-March, the Chicago Board Options Exchange Inc. (CBOE) submitted a letter arguing that the proposed regulations will have a negative effect on foreign investment. The CBOE believes that many broker-dealers will not elect to develop systems to implement the dividend-equivalent rules and block foreign customers from trading options, or some subset of options, such as indexes or certain long option positions. Moreover, foreign investors may be hesitant to trade options given the differing opinions on delta. The letter also addressed other issues pertaining to the coverage provided by the rule and the qualified index exception.

Tax Information Exchange Raising Privacy Concerns. The European Union says their privacy regulators continue to look at the tax information exchanges between EU member states and others. In light of the Foreign Account Tax Compliance Act (FATCA) and the forthcoming information exchanges to be implemented as a result of the Organization for Economic Cooperation and Development (OECD) recommendations, the EU is examining whether there are enough safeguards in place to protect personal data. Similar concerns about the confidentiality of information in country-by-country reporting were raised during the recent Tax Council Policy Institute conference.


Tuesday, 2/24

Senate Finance Committee
The full committee holds a hearing on "Tax Reform, Growth, and Efficiency" in 215 Dirksen. For more information, click here.

House Rules Committee
The committee meets to formulate a rule for H.R. 529 – a bill that would amend the tax code to expand and strengthen 529 college savings plans.

Brookings Institution
Brookings holds a discussion on "Tax Filing and the Affordable Care Act." For more information, click here.

Wednesday, 2/25

House Budget Committee
The committee holds a "Member's Day" in 210 Cannon, allowing members of the House to testify before the committee on their suggested policies and priorities for the Fiscal Year 2016 budget, which is slated for release by the end of March. Get details here.

House Appropriations Committee
The Subcommittee on Financial Services and General Government Subcommittee holds a hearing on oversight of the IRS in 2359.

Thursday, 2/26

House Oversight and Government Reform Committee
The full committee holds a hearing on "IRS: Treasury Inspector General for Tax Administration Update," focusing on the progress made by the Treasury Inspector General for Tax Administration in recovering former IRS Director Lois Lerner's emails.

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